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AM Bulletin: Yen stronger as investors de-risk

Indices Update

There was a weaker tone across global equity markets in early trade this morning with all the major indices shrugging off yesterday’s record US closes. Investors appeared to be scaling back their risk exposure in general as crude oil headed lower and the Japanese yen strengthened sharply. At the time of writing the USDJPY was perilously close to breaking below 100.00 – the level often touted as being the trigger for currency intervention from Japanese policymakers. Although the sell-off in global stock indices is quite shallow so far, it follows on from last night’s simultaneous record closes for the Dow, NASDAQ and S&P500. This was the second time in less than a week that the three major US indices all posted fresh record closing highs at the same time. Over the last month or so, investors have reacted to a bounce-back in oil prices by pushing equities higher in what can best be described as a low-volume, low volatility, low confidence melt-up. The prevailing attitude is that equities should continue to be in demand as the world’s major central banks dribble out dollops of liquidity in the form of bond purchases while flirting with (or adopting) negative interest rate policies. The US Federal Reserve is the only central bank considering tightening monetary policy yet the market assigns very little probability to it taking any action before December. This is providing a tailwind for investors who are struggling to get returns in the current deflationary environment where yields are hard to come by. This has forced money managers to rebalance their portfolios and increase their equity holdings while reducing their exposure to bonds. The hope is that equities will not only pay a dividend but also provide capital growth. The FTSE 100 index closed at 6,941.2 up 25.2 points on the day, or 0.4% The German DAX rose 25.8 points or 0.2% to end the day at 10,739.2 The US30 closed up 59.6 points to finish at 18,636. The S&P 500 rose 0.3% to close at 2,190.1 while the Nasdaq 100 gained 0.4% to close at 4,827.1

Equities

Hennes & Mauritz (HNNMY) posted July sales growth that was a touch better than expected and a pick up from the prior month. The Swedish fashion discount retailer reported a 10% rise in July sales which beat the consensus expectation of a 9% rise. Growth picked up from 8% in June, but slowed from 16% when compared to the same month last year as the group continues with its policy of opening new stores. At the end of last month the store count came to 4,105, compared to 3,649 a year earlier. The stock closed 2.1% higher at 277.40 Swedish kroner.

Commodities Update

Crude oil pushed higher again yesterday in what was perhaps the only interesting trading activity of the whole day. Brent and WTI both hit their highest levels in a month last night on a short-covering rally which has been given a boost by speculation of a producer output freeze. Both contracts also got a lift yesterday following the release of data from market intelligence firm Genscape. The company estimated that there had been a draw of more than 350,000 barrels at the Cushing, Oklahoma delivery point. This was bigger than expected and added to general bullish sentiment. Over the past few weeks, there has been a rekindling of chatter concerning talks to agree a producer output freeze. This seems patently ridiculous on every level and it’s a wonder that anyone gives it the slightest sliver of credence. After all, we all know what happened back in April when a meeting in Doha to discuss freezing production ended in acrimony and without any agreement just as many analysts had predicted. Why things should be different this time round is anyone’s guess. However, it’s also worth remembering that oil not only rallied in advance of the Doha talks, but continued to do so even after the meeting ended in failure. The plan this time round is that OPEC and non-OPEC producers will meet on the sidelines of the International Energy Forum, which groups producers and consumers, in Algeria from 26th-28th September. Last week the Saudi Arabian oil minister made some positive comments about the upcoming talks and yesterday it was Russia’s turn. Russian Energy Minister Alexander Novak told a Saudi newspaper that oil producing nations could take action to stabilise prices. The question now is if oil has the momentum to rally further on production freeze speculation. After all, it is the fundamental supply/demand situation back in the real world which matters most. There are concerns that global demand growth could start to decline. Over the last few days we’ve seen disappointing economic data from the US, China and Japan. On top of that it seems likely that there will be some drop-off in economic activity across Europe and in the UK due to post-Brexit uncertainty. Meanwhile the predicted sharp supply slump has yet to materialise. On Friday Baker Hughes reported another increase in the number of US oil rigs renewing operations. Gold and silver ended yesterday moderately higher in an uneventful trading session. Both metals were supported by a touch of dollar weakness. However, volumes were light as traders adjusted to peak summer doldrums on a Monday. Both metals pushed higher in early trade this morning as the sell-off in the US dollar gathered pace. A falling dollar makes gold cheaper for other currency holders and consequently more attractive. Precious metals should continue to get a lift from the prospect of lower interest rates for longer. With one notable exception, the world’s major central banks continue to maintain an easing bias when it comes to monetary policy. The US Federal Reserve has been desperate to persuade the markets that it would love to raise rates, but it should now be apparent to everyone that it can’t/won’t until December at the earliest. This provides the perfect environment for investors to take on additional risk exposure, as long as the economic indicators point to improving conditions. In this situation equities do well while precious metals are generally ignored. However, gold and silver to particularly well when monetary policy is loose but the economic situation is murky or deteriorating. Friday’s disappointing US retail sales numbers suggests we’re in the latter environment.

Forex Update

Yesterday brought a pretty uneventful start to the week as far as FX was concerned with the US dollar little-changed against all the majors. However, things have livened up a bit this morning as the greenback is definitely out of favour. The US Dollar Index is off around 0.7% while the USDJPY has come within 0.15% of the significant 100.00 level. The speculation is that Japan’s policymakers will intervene to weaken the yen should the USDJPY drop below here. However, some analysts believe they will hold off and wait to see if the USDJPY falls further towards 95.00 before taking action. Investors appear to be coming round to the idea that the Fed won’t be tightening monetary policy at its September meeting. This is the prime reason for the current spate of dollar selling. Last Friday’s poor US Retail Sales number surprised many commentators who were expecting further evidence of a US economic rebound following a strong payroll number earlier in the month. Investors are now looking ahead to this afternoon’s data on inflation, housing and industrial production. Any disappointments here will lead to further dollar weakness.

Upcoming events

Today’s significant economic events include the release of the first post-Brexit look at UK inflation with CPI and RPI due out at 09:30 BST. We also have German and Euro zone ZEW Economic Sentiment surveys and Canadian Manufacturing Sales. From the US we have CPI, Building Permits, Housing Starts, Capacity Utilisation and Industrial Production.

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